IDEAS home Printed from https://ideas.repec.org/p/fth/pennfi/21-89.html
   My bibliography  Save this paper

Data Snooping Biases in Tests of Financial Asset Pricing Models (Reprint 002)

Author

Listed:
  • Andrew W. Lo
  • Craig A. MacKinlay

Abstract

We investigate the extent to which tests of financial asset pricing models may be biased by using properties of the data to construct the test statistics. Specifically, we focus on tests using returns to portfolios of common stock where portfolios are constructed by sorting on some empirically motivated characteristic of the securities such as market value of equity. We present both analytical calculations and Monte Carlo simulations that show the effects of this type of data-snooping to be substantial. Even when the sorting characteristic is only marginally correlated with individual security statistics, 5 percent tests based on sorted portfolio returns may reject with probability one under the null hypothesis. This bias is shown to worsen as the number of securities increases given a fixed number of portfolios, and as the number of portfolios decreases given a fixed number of securities. We provide two empirical examples that illustrate the practical relevance of these biases.

Suggested Citation

  • Andrew W. Lo & Craig A. MacKinlay, "undated". "Data Snooping Biases in Tests of Financial Asset Pricing Models (Reprint 002)," Rodney L. White Center for Financial Research Working Papers 21-89, Wharton School Rodney L. White Center for Financial Research.
    • Handle: RePEc:fth:pennfi:21-89
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ray Ball, 1990. "Discussion of “Specification problems with information content of earnings: Revisions and rationality of expectations and self†selection bias†," Contemporary Accounting Research, John Wiley & Sons, vol. 7(1), pages 178-184, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fth:pennfi:21-89. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Krichel (email available below). General contact details of provider: https://edirc.repec.org/data/rwupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.